European equity and credit markets are braced for a volatile day of trading
after the International Monetary Fund (IMF) and the European Union
dramatically withdrew a €20bn (£17bn) financing deal for Hungary over the
weekend.

The move, which was described by economists as “very rare”, means that Hungary will not have access to standby funds that were secured as part of a 2008 loan deal. The credit line was suspended on Saturday after theEuropean Commission voiced concerns over the newly-elected Hungarian government’s budget plans.

The stark move by the IMF and EU will reignite fears in global stock and money markets about the state of Europe’s sovereign debt. It could also derail the fragile confidence that has been returning to markets after moves to resolve the economic crisis in Eastern Europe.

Hungary’s woes come amid fears of a broader bear market developing as investors adjust to signs of a global slowdown led by the US and China. The weekend’s events will only add to market jitters.

Economists have argued that the return of confidence to Europe is partly based on the assumption that the IMF and the EU will automatically step in as sugar daddies to save failing economies. The suspension of the review of Hungary’s credit line at the weekend will send out an international warning and shows such views to be naïve, observers said last night.

Peter Attard Montalto, economist at Nomura Securities, described the IMF and EU’s action as “a very rare event”.

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“Countries usually go out of their way to satisfy these missions,” he said.

Hungary has Europe’s highest public debt at 80pc of GDP.

Viktor Orban, Hungary’s prime minister who was elected in the spring, last month unveiled a significant austerity package.

However, the European Commission deemed this to be “largely of a temporary nature” and said that the measures “fall someone short” of what is required.

In a statement, the IMF said that Hungary must to reassure markets by achieving the budgetary targets.

“In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced… remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives,” it said.

Attard Montalto, of Nomura, said: “The IMF and EU, given their usually very diplomatic language, have given some very strong statements of disapproval. The post mission statement talks about the fact that clarity isn’t available on policy, the need to respect central bank independence – when have we ever heard that before about a country? – and unsustainable and damaging policies that the new government is putting in place.

“Equally the EU has also said some of the new laws enacted are illegal in the EU.”

Hungary said that it will continue talks with the IMF and the EU in the hope that it would be allowed to continue to draw on the remainder of the loan in the future.

Zoltan Torok, an analyst at Raiffeisen, said: “This is fairly bad news and a mistake by the government.

“The market impact will be negative with a likely over 1pc or possibly bigger currency fall and a jump in yields.”